Life & Style

Posted 26/1/2016

Treasury set to borrow more locally as foreign credit gets expensive

By OTIATO GUGUYU

In Summary

Ms Khan said that traditionally, Kenya has been able to tap the domestic market for its financing needs – hence the depth and liquidity of the Kenyan bond market.

Ms Khan says that the mention of the external borrowing may have been a way of relieving pressure on the domestic market, at a time when liquidity is already stressed by events in the banking sector, and when the Central Bank of Kenya (CBK) has tightened considerably.

The likelihood that the Treasury will resort to domestic borrowing may spook the local market with investors demanding premium rates to lend to the government at the expense of the economy.

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Kenya will rely more on local borrowing to finance this year’s budget gap as unfavourable conditions have made external credit unattractive, financial experts have said.

Global assets manager PineBridge Investments has predicted that Kenya will have to rely on domestic market because borrowing internationally has become too expensive for African countries.

PineBridge Investment CEO Jonathan Stichbury said the risk from hard currency sovereign borrowing such as the Eurobond, which require foreign exchange support to repay, will push the National Treasury away from the international market.

“We expect to see additional pressures on revenue financing with aggressive tax collection being required and additional taxes being levied in 2016,” Mr Stichbury said.

The National Treasury is putting together a supplementary budget set to come out next month. It is expected that the budget will see cuts in spending, consolidation of expenditures and restructuring of the debt ratios.

In the current budget, Kenya expected to raise Sh340 billion from external financing and Sh229 billion from the domestic market to meet the deficit.

“There has been some talk of revised budget plans to be presented soon. That could potentially cut some elements of spending and reshuffle others,” Africa Global Research Standard Chartered Chief Economist, Razia Khan wrote to Smart Company on email.

Ms Khan said that traditionally, Kenya has been able to tap the domestic market for its financing needs – hence the depth and liquidity of the Kenyan bond market.

“Should external conditions remain difficult, we will almost certainly see more reliance on the domestic market,” she said.